How much of the company's earnings growth came from higher metal prices versus higher volumes?

Most of the 2005 growth came from prices. Average LME copper rose from $1.30 to $1.67 per pound and molybdenum from $15.95 to $31.05 per pound. Copper sales volume actually fell 1.6% to 1,540 million pounds, while mine copper output declined 3.9% to 1,521 million pounds, partly because of lower ore grades at Cuajone and Toquepala. Molybdenum output rose modestly, by 2.8%. Management's sensitivity table estimates that a $0.01 change in copper price moves 2006 net earnings by about $8.7 million, and a $1.00 change in molybdenum moves them by about $14.4 million.

What is the financial impact of the Pasta de Conchos mine accident?

The filing describes the February 19, 2006 gas explosion that trapped 65 miners at the Pasta de Conchos coal mine, and it says rescue efforts later shifted to recovering the bodies. It does not quantify any financial effect, such as insurance recoveries, legal liability, or production disruption at that mine. The mine is part of the Nueva Rosita coal complex, which supplies coal for the company's Mexican smelting and is on a planned expansion, so investors should look for disclosure in subsequent quarterly reports.

Why did the company take a large charge to retained earnings in January 2006?

The company adopted the EITF 04-06 consensus, which treats mine stripping costs incurred during production as period operating costs instead of capitalizable assets. On January 1, 2006 it wrote off $499.5 million of net capitalized stripping and leachable material, recording a net charge of $322.9 million to retained earnings after a $176.6 million tax and workers' participation benefit. Going forward, reported operating costs will be higher because these costs are no longer deferred.

How concentrated is the ownership and what are the related-party risks?

Grupo México indirectly owns about 75.1% of the stock, so it controls board composition, dividend policy, and major transactions. Several executives hold roles at Grupo México, and the company does regular business with affiliates, including about $13.8 million per year in management fees paid to Grupo México, freight and construction services from affiliated companies, and sales to affiliated buyers. The company also faces a derivative lawsuit alleging the Minera México acquisition was unfair to minority shareholders, and it has disclosed that Asarco, a Grupo México affiliate, is in Chapter 11 bankruptcy, which could lead to claims against the group.

Is the dividend sustainable given the capital spending and debt?

The company distributed $853.9 million in 2005, roughly 61% of net earnings, and expects to keep paying out a significant share of net income. Operating cash flow of $1,644.2 million covered both capital spending of $470.6 million and dividends. Net debt to total capitalization fell to 8.2% from 17.0%, and cash and marketable securities of $876.0 million exceed the roughly $1.17 billion of debt by a moderate margin. The board says future dividends depend on cash needs, the $412 million of planned 2006 capital expenditures, and covenant limits, and the company cautions that the EITF change will reduce future earnings and cash flow.

SCCO 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 13, 2006. Cited figures are marked; the original filing is the authoritative source.

Southern Copper Corporation's (SCCO) 2005 Form 10-K is dominated by two developments: the April 1, 2005 acquisition of Minera México from Grupo México's Americas Mining Corporation, and a sharp rise in copper and molybdenum prices.

The combined company is now a leading integrated producer of copper, molybdenum, zinc and silver, operating in Peru and Mexico. Because the deal was accounted for like a pooling of interests under common control, all periods are presented on a combined basis, which makes year-over-year comparisons reflect the enlarged company. Net sales rose 32.8% to $4.11 billion^a and net earnings rose 42.5% to $1.40 billion, or $9.51 per share, with operating margin of about 51%.

Byproduct molybdenum sales, which rose about 95% in average price, were a major driver of the increase. The filing also highlights several risks and one-time items that matter for valuation. On January 1, 2006 the company adopted the EITF stripping-cost consensus, which reversed $499.5 million^b of capitalized stripping and leachable material and produced a $322.9 million after-tax charge to retained earnings; management expects higher operating costs in future periods.

Liquidity is strong, with cash and marketable securities of $876 million^c and debt of about $1.17 billion, and capital expenditures rose to $470.6 million, largely for the Ilo smelter modernization. Shareholder distributions were heavy: $5.80 per share was paid in 2005, and a $2.75 dividend was declared for March 2006. Grupo México controls about 75.1% of the stock, which creates governance and related-party considerations.

The Asarco bankruptcy, Peruvian royalty disputes, IRS and SUNAT tax challenges, and a derivative lawsuit over the Minera México deal are the principal contingencies. The filing also reports the February 19, 2006 gas explosion at the Pasta de Conchos coal mine, which killed 65 miners. This is a material operational and reputational event that investors should weigh against the otherwise strong financial results, and the filing does not quantify its financial impact.

02—Key points

Key Highlights

Net sales increased 32.8% to $4,112.6 million in 2005, driven mainly by higher copper (about +30%) and molybdenum (+94.7%) prices; byproduct sales rose 39.1% to $1,373.6 million.
Net earnings rose 42.5% to $1,400.1 million ($9.51 per share), with operating income of $2,094.5 million and an operating margin of about 51%.
The April 1, 2005 Minera México acquisition from Grupo México's AMC roughly doubled production and reserves, which the company says raised copper reserves by 107% and annual output by about 81% (based on 2004 figures).
Adoption of the EITF stripping-cost consensus on January 1, 2006 reversed $499.5 million of capitalized costs and led to a $322.9 million after-tax charge to retained earnings, with higher operating costs expected going forward.
Cash and marketable securities of $876.0 million against total debt of about $1.17 billion; the company paid $5.80 per share in dividends in 2005 and declared a $2.75 dividend payable March 3, 2006.
Capital expenditures rose to $470.6 million, led by the $500 million Ilo smelter modernization (expected completion by end-2006).
A February 19, 2006 gas explosion at the Pasta de Conchos coal mine killed 65 miners, an operational and reputational event whose financial impact the filing does not quantify.

03—Questions

Frequently Asked Questions

How much of the company's earnings growth came from higher metal prices versus higher volumes?
Most of the 2005 growth came from prices. Average LME copper rose from $1.30 to $1.67 per pound and molybdenum from $15.95 to $31.05 per pound. Copper sales volume actually fell 1.6% to 1,540 million pounds, while mine copper output declined 3.9% to 1,521 million pounds, partly because of lower ore grades at Cuajone and Toquepala. Molybdenum output rose modestly, by 2.8%. Management's sensitivity table estimates that a $0.01 change in copper price moves 2006 net earnings by about $8.7 million, and a $1.00 change in molybdenum moves them by about $14.4 million.
What is the financial impact of the Pasta de Conchos mine accident?
The filing describes the February 19, 2006 gas explosion that trapped 65 miners at the Pasta de Conchos coal mine, and it says rescue efforts later shifted to recovering the bodies. It does not quantify any financial effect, such as insurance recoveries, legal liability, or production disruption at that mine. The mine is part of the Nueva Rosita coal complex, which supplies coal for the company's Mexican smelting and is on a planned expansion, so investors should look for disclosure in subsequent quarterly reports.
Why did the company take a large charge to retained earnings in January 2006?
The company adopted the EITF 04-06 consensus, which treats mine stripping costs incurred during production as period operating costs instead of capitalizable assets. On January 1, 2006 it wrote off $499.5 million of net capitalized stripping and leachable material, recording a net charge of $322.9 million to retained earnings after a $176.6 million tax and workers' participation benefit. Going forward, reported operating costs will be higher because these costs are no longer deferred.
How concentrated is the ownership and what are the related-party risks?
Grupo México indirectly owns about 75.1% of the stock, so it controls board composition, dividend policy, and major transactions. Several executives hold roles at Grupo México, and the company does regular business with affiliates, including about $13.8 million per year in management fees paid to Grupo México, freight and construction services from affiliated companies, and sales to affiliated buyers. The company also faces a derivative lawsuit alleging the Minera México acquisition was unfair to minority shareholders, and it has disclosed that Asarco, a Grupo México affiliate, is in Chapter 11 bankruptcy, which could lead to claims against the group.
Is the dividend sustainable given the capital spending and debt?
The company distributed $853.9 million in 2005, roughly 61% of net earnings, and expects to keep paying out a significant share of net income. Operating cash flow of $1,644.2 million covered both capital spending of $470.6 million and dividends. Net debt to total capitalization fell to 8.2% from 17.0%, and cash and marketable securities of $876.0 million exceed the roughly $1.17 billion of debt by a moderate margin. The board says future dividends depend on cash needs, the $412 million of planned 2006 capital expenditures, and covenant limits, and the company cautions that the EITF change will reduce future earnings and cash flow.

04—Continue

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